Historical Stock Market Returns

Superiority of Returns

This resulted in an average yearly return of approximately 14.70%. This means that if you invested $1,000 each January and sold it in January in the following year you would have earned an average of 14.70% on your investment.

The return in the example above is a little higher than the long-term average annual returns which are closer to 11%.

These figures are good but they only represent the returns for the Standard & Poor’s Composite Index over that time. This stock market index contains 500 stocks that are generally considered a good representation of the US stock market.

There are stock market index funds that are available to the public. They can provide consistent returns over extended periods of time. They are a good alternative for an investor who isn’t interested in buying individual stocks.

If you are willing to learn how to buy individual stocks, you should be able to earn a higher return than a stock market index. Certain strategies have provided superior returns in the past.

The American Association of Individual Investors (AAII) lists some computer-generated returns (using historical data) for different strategies. The results are quite impressive.

From the figures they supplied, I created an average yearly return for the various strategies.

Here are some of the better strategies:

• These results are impressive, but all of these strategies produced losses in some years. This highlights the importance of investing for the long-term. Long-term doesn’t necessarily mean buying shares and holding them forever. It means staying invested in the market.
• Some of these strategies require more work and ongoing monitoring than others.
• Once you commit to a strategy, you need to stick with it.

Discipline is a hallmark of a successful investor. Sticking to your strategy and following your own rules is critical.

Strategies are covered in more detail in the Stock Market Strategies section.

Safety

Before the great depression, stocks were considered a risky investment proposition. This was because people weren’t really investing. They were speculating.

So what’s the difference between investing and speculating? In the last lesson (Lesson 1: Smart Ways To Invest Money), we defined investing in terms of performing thorough analysis before purchasing a potential investment. Ensuring the safety of our invested capital. And only investing if we expect to earn an adequate return. That’s what investing is. Anything else is speculation.

Stock investments can have a lower risk than other investments. You can easily spread your risks across multiple stocks and multiple stock market sectors. Preservation of capital is of the utmost importance.

A well diversified portfolio not only minimizes your risk of loss, but if you keep the number of stocks in your portfolio to a sensible minimum, superior gains can be achieved. The more stocks you own the closer you get to average returns.

Convenience

• Stocks are excellent investments. Just look at the historical stock market returns.
• Safety can be achieved by diversifying your portfolio and only buying stocks that have a margin of safety.
• Stocks are convenient investments. You can start with a small. amount of capital. And you can buy and sell when you need to.
• Continue on to Lesson 3: Understanding the stock market